EDUCATION COULD BE the key to figuring out China's complex taxation system and may help enterprises avoid misunderstandings that could lead to an intensive audit and possible disruption of their business. According to Danny Po, a tax partner at Pricewaterhouse Coopers, the mainland tax authorities are more aggressive than their Hong Kong counterparts in carrying out investigations. He said it was important for companies to understand their tax liabilities and maintain clear and accurate records to reduce their chances of falling foul of an auditor. Often the grounds for an official audit were not company malpractice or over-exuberance on behalf of the mainland tax authorities but a simple matter of miscommunication or the way a company's tax was recorded, he said. 'Unlike Hong Kong, where the system for charging profits tax is relatively straightforward, the mainland has many different tax systems at rates that vary from province to province,' Mr Po said. These include corporate tax charged at different rates according to the type of business carried out, sales tax, value-added tax on goods and services, luxury goods tax, consumption tax and miscellaneous taxes applied by the local authorities. The mainland authorities have stepped up their efforts to collect corporate taxes over the past year. A number of tax audits performed on companies have been publicised in the media to raise awareness and pre-empt taxpayers trying to circumvent the tax laws. Increasingly, mainland government departments are working together and sharing information. Tax audits are usually carried out by investigation teams from the tax bureau at the local or even provincial level. Selection is based on sampling criteria such as the taxpayer's financial and tax position, level of sales, industry and nationality or origin of the parent company. An audit could also result from a company being reported. Mr Po said audits were sometimes carried out when a local tax bureau came under pressure to achieve higher tax revenue targets. Whatever the reason, it was better for a company to be prepared for an audit than to try to minimise the impact once one was under way, he said. Getting prepared could involve implementing suitable internal control mechanisms and being aware of the latest compliance requirements. 'To develop an effective strategy for handling an audit, it is important to understand the tax authorities' underlying motive and agenda, and to determine what sort of information and documents should be submitted,' Mr Po said. He recommended clients carry out a complete 'health check' every three to five years to identify any areas of non-compliance. If any irregularities were discovered, companies should volunteer the information and pay any additional tax necessary. 'By volunteering, companies are in a better position to seek lenient treatment and may find they receive a lesser penalty and surcharge,' Mr Po said. This process may require the assistance of specialists with experience in preparing for an audit and dealing with queries from officials. Mr Po said transfer pricing had become a hot topic recently as there had been a surge in audits of transfer pricing agreements, especially where foreign enterprises were involved in joint ventures or making offshore interest payments. He said it was important that companies had a properly structured transfer pricing policy in place and that management looked at a company's entire operation to make sure it was operating within accepted industry parameters. This could be achieved through benchmarking with other companies in the same sector. For example, if the industry standard for transfer pricing was 10 per cent, it would be wise to operate close to the same figure, he said.